Hailing from Kfardebian, one of Lebanon’s culinary capitals, Central Bank Governor Riad Salameh likely knows the importance of a good tatbileh, the instinctual addition of a few spices just as a dish is about to be served. But, if reports are true, his latest recipe to spice up the Lebanese economy with a stimulus package risks leaving those with full bellies fatter and most of us a little hungrier.
Salameh announced his stimulus plan in interviews last November and has since offered some, but not all, the details. On the surface, the plan is simple Keynesian economics: stimulate a sector of the economy that creates a knock-on effect on others, thus increasing overall output, known as GDP. This strategy has the added advantage of decreasing unemployment as more businesses seek to expand and hire more staff as a result. The downside of both decreasing unemployment and increasing output is that it also raises inflation, something Lebanon hardly needs at this juncture.
Since the outbreak of the global financial crisis, Keynesian stimulus packages have made a comeback. In the US it staved off another depression by, amongst other things, buttressing the housing market. But in the US, inflation is relatively low and interest rates are zero, which isn’t the case in Lebanon. What’s even more worrying is the sector Salameh appears to have chosen to drive the stimulus forward: the housing sector.
What we know of Salameh’s proposal so far is that he intends to give banks access to cheap credit in order to fund more mortgages early next year. For several reasons, this will mean the financial sector is again prioritized over the general economic good, and widening income inequality will be the pill we Lebanese will have to swallow, again.
To start off, the housing market has been on fire for years, and homes within a commutable distance from economic centers (especially Beirut) are already beyond the reach of many ordinary citizens. Allowing banks to give out cheap credit will only inflate the sector further and thus make worsen the situation by incentivizing developers to build more buildings for wealthy and foreign residents who make up the bulk of current demand.
Unless Salameh is intending to support low-income housing (an unlikely scenario), those customer segments will make up the lion’s share of the new mortgages because – as anyone who has tried to get a loan in Lebanon knows – they already have the collateral. For those who don’t, they can either stake everything they own on a home or simply leave town, a choice that may come soon.
Speaking to Reuters about the stimulus last month, Salameh looks to be in quite a hurry: “You have to operate, not to wait until everything is clear and quiet, because you would lose opportunities and lose time. It’s like asking Japan not to do anything until they don’t have earthquakes.”
This is an incredulous notion.
For years the Central Bank has been claiming that the rapid growth of the home loans portion of bank loan portfolios is not a problem. Now, suddenly, they need support when they have lower profits, because economic activity is down due to the war in Syria?
Of course, the banks are complicit in all this. It’s much easier and less risky to offer a housing loan to someone who has collateral than a loan to, for instance, small businesses that could actually benefit less well-to-do citizens and break up the monopolies of large families. Instead of allowing the banks to continue to achieve such short-term returns on real estate, the Central Bank could actually let the market finally cool off so that prices don’t continue to rise; maybe they could even fall one day.
But let’s not forget that many local banks also have real estate arms and thus maintain a vested interest in the sector that goes beyond portfolio security.
The government appears to be in on the game too. There is a tax proposal for the real estate sector aimed at raising funds to pay off the protesting public sector workers who are demanding a pay raise – otherwise known as purchasing patronage.
Of course, one can argue that more housing consumption drives GDP – and it has: The years of economic growth were driven in large part by the real estate boom. But those who actually benefited from the multiplier effect it created were sector subsidiaries such as cement, cabling, and steel finishing. The Jumblatts, Hariris, other so-called “big families,” and the Maronite Patriarchy already own large stakes in the cement sector – the primary real estate subsidiary – while the banks fund all other subsidiaries. MPs such as Amal’s Yasin Jaber, to name but one, also own real estate firms, and parliament has consistently vetoed budget proposals to regulate or tax the sector.
Whatever employment came from real estate expansion did not help the Lebanese much either. Most jobs in construction and its subsidiaries are filled by relatively cheap Syrian labor, not by Lebanese. So even if the stimulus works and growth occurs, it won’t help the whopping 64 percent of Lebanese that are of working age and either inactive or unemployed, according to official figures.
Those who could not afford the houses being built during the boom had to deal with the inflationary effects, and this time will be no different. While every freshman economics student knows that introducing a stimulus in an inflationary environment only makes prices rise and ordinary consumers worse off, that is exactly what is being proposed. And it’s not as if the Central Bank doesn’t know this. It recently revised its 2012 inflation estimate from 4.5 to 6 percent.
In a country where the richest 20 percent consume six times more than the poorest, according to the UN, more inflation will only entrench dependence on the wealthy spending more and widen inequality. What’s more, while those are the latest figures, they are from 2008, meaning the current situation is much worse.
As usual, there is some patchwork being done. The governor has said the package will support productive sectors, but it’s obvious the housing component is the focus, not least because it was announced as such. Salameh also says the stimulus will spur the Beirut Stock Exchange through new listings by start-up enterprises, small businesses, and oil and gas firms. However, the bourse is not going to all of a sudden come into its own, or benefit us Lebanese at large, when a few small companies list. As for oil and gas, it will need at least seven years to start producing if (and that’s a big if) hydrocarbons are found. Neither means much to ordinary citizens who can’t afford stocks anyway.
Something that would have truly stimulated the bourse would be the listing of Middle East Airlines or the Casino du Liban, both owned by the Central Bank. Those were delayed several times over the last years because it was not the “right environment.” If you are wondering where Salameh’s sense of urgency was then, consider that the bourse is now regulated by the Central Bank under the new capital markets law.
To his credit, Salameh has on several occasions helped Lebanon’s economy remain shielded from fractious politics, international crises, and maintained the value of the currency. Yet for the most part his decisions also favored the interests of the banking system over reduced inflation, reversing the accumulation of debt, and supporting productive sectors.
At a time when people are increasingly worried about Syria, this package could pass without notice and we will only pay for the effects later when housing prices rise further and inflation kicks in. By then, things in Syria may have changed, but the Lebanese economy will be more unequal and people will have a harder time just finding an affordable place to live.
Thus, if the stimulus is implemented as a housing package, it will likely serve the Lebanese with a dish that leaves a bitter taste in our mouths and less money in our pockets.
First published in Al Akhbar English on December 27, 2012
Sami Halabi 